2. 1 E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES Breakout Session # C10 Name: Eric S. Crusius, Esq. and Stephen Ramaley, Esq. Date: Monday, July, 30, 2012 Time: 4:00PM – 5:15PM

3. 2 Today’s Agenda 1.Overview of the Universe: looking at import and export controls 2.A Look at the Buy American Act (BAA) 3.A Look at the Trade Agreements Act (TAA) 4.A Look at the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

4. 3 Today’s Agenda BAA TAA AECA ITAR E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

5. 4 The Universe Sources of the laws and regulations include: Statutes (such as the Trade Agreements Act) Regulations (such as ITAR: 22 CFR §§120-130) Protests at GAO (or the Court of Federal Claims) Executive Orders E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

6. 5 The Universe Besides BAA, TAA, AECA, and ITAR, there are numerous other laws and regulations to consider including: Export Administration Regulations (EAR) which deals with “dual use” (but primarily commercial) products. Office of Foreign Assets Control (which contain numerous country-specific sanctions and regulations). Foreign Corrupt Practices Act (and others – a few dozen in total). E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

7. 6 The Universe The Statutory and Regulatory Maze: Statutes and regulations that deal with imports and exports are distinct and equally important. Many of the statutes and regulations overlap – there are dozens of statutes and regulations that deal with this area. This overlap makes it difficult for companies to ensure compliance without outside specialty help. E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

8. 7 Interplay Between BAA and TAA USTR sets threshold for applicability of BAA and TAA. Below a certain threshold, BAA is applicable. IDIQ contracts look at the total dollar of all task orders to be issued. The threshold is usually $203,000 for supply and service contracts and $7,443,000 for construction contracts. Check FAR Part 25.4 for updates. There are some lower exceptions. Can you name them? E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

9. 8 Interplay Between BAA and TAA Canada Mexico CAFTA (all Central American countries except Belize, Panama, and Costa Rica plus the Dominican Republic) Australia Singapore Israel E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

10. 9 The Buy American Act Certain end products must be manufactured in the United States (domestic end product). A domestic end product is: Manufactured in the United States, and The cost of the components mined, produced, or manufactured in the US exceeds 50% of the cost of all components. No exception for small business, but must be above micro-purchase threshold. E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

11. 10 The Buy American Act Exceptions to the Buy American Act: Over certain dollar threshold Public interest Nonavailability Unreasonable cost Resale COTS information technology COTS (not IT) must only be manufactured in the US E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

12. 11 The Trade Agreements Act Under the Trade Agreements Act, the BAA restrictions are waived if the dollar threshold is high enough for certain countries. If a product is manufactured in a TAA country and the dollar threshold is met, it is as if the product was manufactured in the United States. Leases, rentals, and lease to purchase are included. E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

13. 12 The Trade Agreements Act What are TAA Designated Countries? WTO GPA Members Australia NAFTA member countries CAFTA member countries (including the DR) Israel Others including Morocco, Bahrain, Chile, Peru, Oman, and Singapore E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

14. 13 The Trade Agreements Act Product must undergo a “substantial transformation” in a TAA designated country or the United States. What are some examples of a “substantial transformation?” E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

15. 14 The Trade Agreements Act Factors in determining whether a “substantial transformation” has occurred: Amount of processing and whether such processing gives the product a new use or character (or new name). Degree of skill necessary for the processing. Resources expended. Processing can include mixing, blending, machining, and assembly. E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

16. 15 The Trade Agreements Act The big red elephant in the room: E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

17. 16 The Trade Agreements Act With the TAA (and also the BAA), country of origin discoveries are sometimes made during the protest process or during Qui Tam cases. Falsely stating a country of origin is a false claim/statement. Look out for your subcontractors. E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

18. 17 The Trade Agreements Act Specialty metals have additional regulations if above the simplified acquisition threshold. Must be melted or produced in the United States. Exceptions include acquisitions for: (i) combat operations outside the US, (ii) where non-competitive procedure used and urgent need, (iii) contingency operations, and (iv) resale in a commissary. Exception also for COTS products, de minimus incorporation, commercially derivative military articles, or manufactured in a qualifying country. E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

19. 18 The International Traffic in Arms Regulations (and AECA) T RADE A GREEMENTS FOR D UMMIES

20. 19 The International Traffic in Arms Regulations (and AECA) Applicable Laws and Regulations Arms Export Control Act – enabling statute International Traffic in Arms Regulations – applicable regulations Other Overlapping Regulations E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

21. 20 The International Traffic in Arms Regulations (and AECA) DDTC controls goods, services & data to be exported. What other agencies have their hand in export controls? What are agencies charged with enforcing ITAR? E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

22. 21 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES Office of Foreign Assets Control - Embargo and Sanctions List Enforces ITARControls Dual-Use Items

23. 22 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES A Quick Quiz on Office of Foreign Assets Control - Embargo and Sanctions List. Which country is on the list? OR

24. 23 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES Answer: Other countries include Sudan, Syria, Iraq, Iran, Cuba, Libya (last updated 2/12), Yemen, Somolia, Burma. Check: http://www.treasury.gov/resource- center/sanctions/Programs/Pages/Programs.aspx

25. 24 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

26. 25 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

27. 26 The International Traffic in Arms Regulations (and AECA) Under ECR, a three phased review effort will be implemented: Phase I. Develop methodology for rebuilding control lists. (Phase I completed in 2010) On December 9, 2010, the U.S. Departments of State and Commerce issued proposed regulations to reform their control lists, the USML and CCL, respectively, in accordance with the ECR Initiative. Both Departments also solicited public comments on how to make their control lists more “positive” and how to tier the lists taking into consideration the military or intelligence significance of an item and foreign availability information. This is the result of core decisions made by the Administration on a methodology to determine what should be controlled, which is the foundation of the entire export controls system. What does a “positive” control list mean? Describing items using objective criteria, such as qualities to be measured (e.g., accuracy, speed, and wavelength), units of measure (e.g., hertz, horsepower, and microns), or other precise descriptions, rather than broad, open-ended, subjective, catch-all, or design intent-based criteria. Fundamental changes are coming to the USML….. E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

28. 27 The International Traffic in Arms Regulations (and AECA) Phase II. Apply methodology, restructuring the USML and CCL into identical tiered and positive lists, and utilize “bright line” process. Phase III. Merge USML and CCL into one list of controlled items, which will be administered by a single control agency. (Phase III requires completion of Phase II list review as well as Congressional Legislation) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

29. 28 The International Traffic in Arms Regulations (and AECA) The Export Control Reform Initiative: The Latest Some items on USML XIII would be moved to a new 600 Series on the Commerce Control List (comments on proposed rule on mechanism for doing so close August 6, 2012); Current administration is seeking to expand trade with trusted partners while protecting “crown jewels” of U.S. technology. E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

30. 29 The International Traffic in Arms Regulations (and AECA) The Interplay Between ITAR and the Export Administration Regulations: Each has a list – USML and the Commerce Control List; List sometimes overlap. CCL covers “dual use” items while USML (in theory) covers items developed for military use. E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

31. 30 The International Traffic in Arms Regulations (and AECA) How do I know if my company is subject to ITAR? Do you or your company manufacture items on the USML? Do you or your company export goods (including data) or services on the USML? Do you or your company import goods (including data) or services on the USML? Does your company engage in brokering activities in the transfer of goods or services on the USML for any of the above circumstances? E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

32. 31 The International Traffic in Arms Regulations (and AECA) If yes to any of the previous questions: Your company must register with the Directorate of Defense Trade Controls (this does not confer export rights). To register your company must submit a Department of State Form DS- 2032. Your company must obtain licenses (Manufacturing License Agreement, Technology Assistance Agreement, or Warehouse and Distribution Agreement) to “export” products or services on the US Munitions List. It is important to also set-up internal systems to ensure your company is compliant with AECA and ITAR. E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

33. 32 The International Traffic in Arms Regulations (and AECA) Set-up a Strong Compliance Program: Management should issue a company-wide policy emphasizing the importance of compliance and spell out the consequences of non-compliance. Create a reporting structure that identifies who is responsible for what in the compliance chain. Create a system that will allow the company to identify ITAR products, data and services and what to do with that information. Create a system to ensure those identified products, services, and software are not exported without a license. Train, train, train! E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

34. 33 The International Traffic in Arms Regulations (and AECA) Is my product/data/service subject to ITAR? It is if it’s on the US Munitions List, it is subject to ITAR. Items on the US Munitions List include articles or services that: Is designed, adapted, or modified for a military application and does not have a predominant civil application and does not have performance equivalent to those of an article or service used for civil applications, OR E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

35. 34 The International Traffic in Arms Regulations (and AECA) Is my product/data/service subject to ITAR? “Is specifically designed, developed, configured, adapted, or modified for a military application, and has significant military or intelligence applicability such that control under this subchapter is necessary.” If unsure, can seek Commodity Jurisdiction from the DDTC. E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

36. 35 The International Traffic in Arms Regulations (and AECA) The U.S. Munitions List contains 21 broad categories of products/data/services covered under ITAR. They include: Firearms, ammunition, rockets, explosives and related products (Categories 1-5) Military equipment, vessels, vehicles and aircraft (6-10) Military electronics (Category 11) Optical and guidance control equipment (Category 12) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

37. 36 The International Traffic in Arms Regulations (and AECA) Auxiliary equipment such as cameras and camouflage (13) Biological, chemical and toxicology agents and related protective equipment (Category 14) Space equipment (Category 15) Nuclear technology (Category 16) Technical data and services that are classified (Category 17) Directed energy weapons (Category 18) Oceanographic equipment (Category 19) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

38. 37 The International Traffic in Arms Regulations (and AECA) Miscellaneous (Category 21): “(a) Any article not specifically enumerated in the other categories of the U.S. Munitions List which has substantial military applicability and which has been specifically designed or modified for military purposes. The decision on whether any article may be included in this category shall be made by the Director of the Office of Defense Trade Controls. (b) Technical data (as defined in § 120.21 of this subchapter) and defense services (as defined in § 120.8 of this subchapter) directly related to the defense articles enumerated in paragraphs (a) of this category.” E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

39. 38 The International Traffic in Arms Regulations (and AECA) A quick word on the CCL: CCL Categories 0 = Nuclear materials, facilities and equipment (and miscellaneous items) 1 = Materials, Chemicals, Microorganisms and Toxins 2 = Materials Processing 3 = Electronics 4 = Computers 5 = Telecommunications and Information Security 6 = Sensors and Lasers 7 = Navigation and Avionics 8 = Marine 9 = Propulsion Systems, Space Vehicles, and Related Equipment E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

40. 39 The International Traffic in Arms Regulations (and AECA) A quick word on the CCL: CCL Groups within categories A. Systems, Equipment and Components B. Test, Inspection and Production Equipment C. Material D. Software E. Technology E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

41. 40 The International Traffic in Arms Regulations (and AECA) Specific Issues: Defense Services – Yes, they’re covered if associated with ITAR item. Requires Technology Assistance Agreement filed and approved by DDTC and signed by recipient of service. Parts, Components, and Accessories – If a part of a larger item is covered by ITAR, then the larger items is likely covered by ITAR Software Products – Yes, they’re covered – and easy to “export.” E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

42. 41 The International Traffic in Arms Regulations (and AECA) Specific Issues: Definition of “Export” Includes: What does “export” mean? On a shared network accessible in a foreign country or accessible by a foreign national. Talk above covered item, data, or service (more than advertising) with foreign national or in foreign country. Send e-mail to foreign national. E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

43. 42 The International Traffic in Arms Regulations (and AECA) Specific Issues: Corporate Structure Issues: Mergers and Acquisitions bring specific issues: acquiring company can be liable for export control violations of acquired company. Subsidiaries and Joint Venture partners. E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

44. 43 The International Traffic in Arms Regulations (and AECA) The Penalties for Non-Compliance are harsh: Up to 20 years imprisonment Civil penalties up to $1 million per violation Liability flows from the corporations through to individuals including employees, officers, and directors Debarment, suspension, and seizure – remember ITT! E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

45. 44 The International Traffic in Arms Regulations (and AECA) Time For Some Fun! E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

46. 45 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

47. 46 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES Company sends commercial satellite and launch vehicles to launch satellites to China.

48. 47 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES YES.

49. 48 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES Individual exports antennae to Singapore outside of his own company. Is that a violation for the individual???

50. 49 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES YES.

51. 50 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES Company exports software to Canada that is then exported to China. The software is used to power an attack helicopter. Software company was unaware that purpose was for military helicopter as opposed to civilian helicopter.

52. 51 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES YES.

53. 52 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES

54. 53 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES Company fails to report sale of USML goods to China.

55. 54 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES YES. “Any person who knows or has reason to know of such a proposed or actual sale, or transfer, of such articles, services or data must immediately inform the Office of Defense Trade Controls.” 120 CFR 126.1.

56. 55 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES Company exports items on USML that were incorporated into a larger product.

57. 56 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES YES.

58. 57 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES University professor (who claims ignorance of ITAR) gives access to USML covered technology to graduate students who are not US citizens.

59. 58 The International Traffic in Arms Regulations (and AECA) E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES YES. Professor spent four years in prison.

60. 59 Questions? Eric S. Crusius ecrusius@centrelawgroup.com Stephen Ramaley sramaley@centrelawgroup.com E XPORT C ONTROLS AND T RADE L AWS FOR D UMMIES